The Fundamentals Versus The Fed

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Earnings during the quarter were lower than originally forecast, as weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance.

Intel Corporation today announced that third-quarter revenue is expected to be below the company’s previous outlook as a result of weaker than expected demand in a challenging macroeconomic environment.

Overlooked amid the cheer in the markets run to new bull market highs last week were earnings warnings from two economic bellwethers. On Tuesday, FedEx (FDX) said that earnings are expected to be between $1.37 – $1.43 compared to previous guidance of $1.45 – $1.60. On Friday, Intel (INTC) lowered their revenue guidance to $12.9 bil – $13.5 bil from $13.8 bil – $14.8 bil. Both cited a weak global economy as the cause.

At the same time FedEx and Intel were taking down numbers, the S&P notched new bull market highs on both Thursday and Friday. What gives?

On Thursday, the ECB sparked the breakout by announcing new bond buying measures. Earlier today, the German Constitutional Court approved the constitutionality of the European Stability Mechanism (ESM), the fund for providing bailouts to euro members. Tomorrow (Thu Sept 13) is the much anticipated Fed decision with many expecting QE3.

In other words, investors find themselves in the position of a strung out junkie begging for one more fix. One might wonder how solid a foundation this provides, but that is of little concern to the short term traders at hedge funds and among the Twitterati for whom fundamentals have become passe.

Apparently the fundamentals are still of concern to Spanish bank depositors who pulled €75 bil, or 5% of all deposits, in July. The gold market has also taken notice breaking out to a 6 month high above $1700/ounce.

Whether Bernanke delivers tomorrow or not, what is fast becoming apparent is that this market requires larger and larger doses for the same high. The problem is that higher doses increase the odds of dangerous and unwanted side effects.